Investment bonds for daughter

IanPt

Hi,

My 10 year older daughter has recently inherited some money and my wife and I have been appointed trustees to manage the money until she's 18.

Its in the order of 30k so a significant amount and I've taken some initial advice from an IFA. My main request was that investments have mainly low risk bias with the objective being to ensure that overall return (including any charges) over the next 8 years at least matches inflation. Her advice was to to place it all in a number of funds wrapped in an investment bond wrapper (Legal & General Portfolio Bond). While on first sight the funds selected did seem to give an appropriate spread of risk the charges seemed rather high (approx 2% p.a.). Also on further reading there seems to be some advice that investment bonds are not particualarly suitable for non taxpayers.

Overall I was not that impressed by quality of her answers or the lack of examination of other options for investment - while I could go back to her or to another adviser it would be really useful if anyone with more experience in this sort of thing had any thoughts.

Thanks in advance.

Emmamumof2

You can access a wider range of funds utilising a Unit Trust and the charges are usually more competitive. Are you concerned about the money being 100% secure or are you happy to take some risk to keep pace with inflation? If you are concerned about a definite guarantee you could use a "structured" investment with a capital guarantee.

dunstonh

Investment bonds have a range of suitable trusts available. Whereas trusts on unit trusts are much newer (in general) and more limited a lot of the time. If its a Will trust, then a unit trust would be possible.

While on first sight the funds selected did seem to give an appropriate spread of risk the charges seemed rather high (approx 2% p.a.).

Typically, with internal funds you would expect around 1%. What is the reduction in yield (look at the back of the illustration where it says 6% will be reduced to x% due to charges). This is more reflective of the real costs as many old style investment bonds are multi-charged and you cant look at the AMC alone. More modern investment bonds are mono charged where you can.

IanPt

Emmamumof2 wrote: »

Are you concerned about the money being 100% secure or are you happy to take some risk to keep pace with inflation?

Don't necessarily need it to be 100% secure and am happy have some risk (within limits).

Sceptic001

If your main aim is to protect against inflation you can do this by putting £15k each into NS&I index-linked 5 year and 3 year issues and re-investing on maturity. However, in these circumstances it may be a better option to take advice from a good IFA to achieve better long-term returns.

feesarefare

IanPt wrote: »

Hi,

My 10 year older daughter has recently inherited some money and my wife and I have been appointed trustees to manage the money until she's 18.

Its in the order of 30k so a significant amount and I've taken some initial advice from an IFA

Was it an IFA or a FA , i would only expect bank IFAs to recommend L&G Bonds or their own tied agents

. My main request was that investments have mainly low risk bias with the objective being to ensure that overall return (including any charges) over the next 8 years at least matches inflation. Her advice was to to place it all in a number of funds wrapped in an investment bond wrapper (Legal & General Portfolio Bond). While on first sight the funds selected did seem to give an appropriate spread of risk the charges seemed rather high (approx 2% p.a.).

Your right , higher than average. What sort of commission / fee structure have you agreed with the IFA.

Also on further reading there seems to be some advice that investment bonds are not particualarly suitable for non taxpayers.

True as your effectively paying basic rate tax on an ongoing basis when you dont need too.

Overall I was not that impressed by quality of her answers or the lack of examination of other options for investment - while I could go back to her or to another adviser it would be really useful if anyone with more experience in this sort of thing had any thoughts.

Thanks in advance

She could have just recommended unit trusts and designated them for your daughter.

feesarefare

Sceptic001 wrote: »

However, in these circumstances it may be a better option to take advice from a good IFA to achieve better long-term returns.

Hi Sceptic

Just out of interest how would you define a"good ifa" and how would go about finding one?

IanPt

dunstonh wrote: »

Investment bonds have a range of suitable trusts available. Whereas trusts on unit trusts are much newer (in general) and more limited a lot of the time. If its a Will trust, then a unit trust would be possible..

We're have had a deed of trust arranged which allows us to manage the money on behalf of our daugher

dunstonh wrote: »

Typically, with internal funds you would expect around 1%. What is the reduction in yield (look at the back of the illustration where it says 6% will be reduced to x% due to charges). This is more reflective of the real costs as many old style investment bonds are multi-charged and you cant look at the AMC alone. More modern investment bonds are mono charged where you can.

If I remeber correctly the reduction in yield was basically 2% (higher in the first few years, very slightly lower post 10 years). From my perspective I think this means that if inflation averages say 2.5% over the period then I would need to get growth of 5.5% (yield 3.5%) to equal what I can get from NS&I indexed linked bonds, which is completely guarranteed - to return some sort of risk premium I'd need 6-7% p.a. which based on the example returns of 4 / 6 / 8 % on the fact sheets sounds ambitious. Also I'm still unclear on the tax implications, It seems that investment bonds are taxed within the bond which doesn't sound great since my daughter is not a taxpayer and is not likely to be in the main period of the investment.

Sceptic001

feesarefare wrote: »

Hi Sceptic

Just out of interest how would you define a"good ifa" and how would go about finding one?

A very good question! In this case I would ask the IFA what to do with £30k to protect against inflation with minimal risk. If their initial response included reference to ILSCs (knowing full well that that would earn the IFA precisely nothing) then I would be favourably impressed, and willing to consider other options they may suggest.

dunstonh

As feesarefare also says, have you checked to see if its actually an IFA and not an FA? L&G havent had a decent priced bond for a long time. It would be worth seeing what the justification is over the much better priced versions available.

As already mentioned above, you should ask them why they have discounted unit trusts which would be a more tax efficient option?

to return some sort of risk premium I'd need 6-7% p.a. which based on the example returns of 4 / 6 / 8 % on the fact sheets sounds ambitious.

You cant compare 4, 6 & 8% on bonds with say 4,6 & 8% on unit trusts, for example, as the tax differences will not give like for like. Those returns are not ambitious with relevent investments. However, the lower the risk you take, the lower the likely returns will be and the more important charges become. The reason 4, 6 & 8% are on the illustrations as examples is that they are considred the most likely long term average range.

IanPt

Thanks feesarefare and Sceptic001, you have clarified some of my concerns. You've also crystalised my issues with the IFA (she was supposedly independent). My initial thoughts had been to put some of the money in index linked national savings and then look to spread some in slightly higher risk investments including equities. I was also looking for some advice on the mechanics of holding money in trust, tax etc and did say that I was happy to work with the IFA on a fee payed basis if that seemed more appropriate.

Interesting experience - I think I'm moderately financially literate but am not finding it all straightforward and it doesn't help when you feel you can't necessarily trust the advice you're given. My wife said after the last meeting that she could tell it wasn't going well because I didn't have my happy. smiley face on .